The New Market Bubble Theory
27-01-06 Revista de Prensa
By Michael Grebb
So here's the good news: The next five years will bring us the biggest stock-market boom in history. The bad news? The party will end in late 2010, after which we'll face the worst economic decline since the Great Depression.
Welcome to the world of Harry S. Dent, an economist and demographic researcher whose 1992 book, The Great Boom Ahead, called the stock-market bubble of the late '90s when few saw it coming. In his 2004 book, The Next Great Bubble Boom, Dent predicts an even bigger bubble forming over the next few years. That is, before everything crashes down around us.
We caught up recently with Dent to talk about where the markets are heading, and where to park our spare cash.
Wired News: What's the current outlook for stocks?
Harry Dent: We think the market bottomed at 10,000 (in 2004). We're coming up, threatening to break out of this trading range, finally. We'll probably pull back one more time first. And then just come to the top of it again. Then we'll basically see a five-year rally from about late 2005 into mid- to late 2010.
WN: You've revised your projections before. How sure are you about the timing of the boom?
Dent: If we don't see a pretty substantial breakout in the next few months, we may reduce our targets. But so far we're following almost exactly the scenario of the Roaring '20s and very closely to what happened in the '90s -- right before we broke into a bubble that no one expected. Obviously, it's hard for stocks to take off with oil going straight up to $71 a barrel. It's hard for stocks to take off when the Fed keeps saying, "We're going to raise interest rates higher and higher, and we don't care what the bond markets say about inflation." And every day, people putting more money into housing speculation is more money not going into the stock market. Now that housing is deflating, there's no place for money to go. The money has to go back into stocks. We see the Dow at 32,000 to 40,000, and probably on the higher side. The Nasdaq around 13,000.
WN: Will tech stocks lead the rally?
Dent: We see a broader tech boom, including biotech, resuming now that we're over this crash. Businesses have cut costs and expanded their ability to grow with past investments. Now, businesses are going to have to catch up and reinvest to keep up with consumers, who never stop spending. Businesses will come back big time, and that money largely flows into information technology.
WN: But won't memories of the dot-com bust of 2000 temper investor enthusiasm for another tech bubble?
Dent: No it won't. People say, "Oh, how could we have another bull market with so many people pessimistic and hurting and wounded?" But the truth is that bull markets don't start with the everyday investor. It's an S curve like anything else. The smart money starts buying in. The markets start going up. The more the markets go up, the more people get drawn into it over time. And the bubble ends when everybody's in. So all of these people who got hurt the most and say, "I'll never buy stocks again" or "I'll never touch tech stocks" ... let the market go up 30 (percent) or 40 percent a year, year after year, and see how many change their minds. It's like the housing thing. Everybody says it's nuts. It doesn't make sense. But it just keeps going up and up. The next thing you know, everybody has bought a condo. Everybody has bought a second home because they think, "Hey, this is a good investment."
WN: You predict this new stock-market bubble will burst in late 2010, followed by a long decline. Are we talking about something like the 1970s or more of a cataclysmic downturn like the Great Depression?
Dent: I'd say it's going to be in between. It won't be as extreme as the Great Depression. But it will be worse than the '70s downturn, and I think it will be worse than what Japan saw from 1990 to 2003. Maybe we'll see unemployment at 15 percent, give or take. The worst part of it is you're going to see deflationary trends in prices from a shrinking work force. Deflation is the enemy of asset prices. You've got to remember that in the '70s, while the Bob Hope generation was declining in their spending, you had a bigger generation coming behind them entering the work force and picking up some of the slack. Now you've got a smaller generation following the largest generation in history. So it makes the downward trend even more pronounced.
WN: What are some defensive measures for the downturn you forecast?
Dent: For the first couple of years -- around the summer of 2010 -- you start moving out of stocks and equities and getting into very-high-quality corporate bonds in companies that are going to survive no matter what and maybe some short-term treasury bills. You let the crash unfold. These downturns usually take two to three years to play out. Once you see a major crash, then you can move into Asia; then you can move into health care and pharmaceuticals and biotech; and then you can move into retirement real estate. For people entering retirement, I'd say just buy an annuity for the rest of your life. Or just get into high-quality bonds and set yourself on automatic pilot.
WN: Is there anything the government or businesses will be able to do to stop or minimize the downturn you're predicting? Or is it just going to happen no matter what?
Dent: The best thing businesses and consumers can do is, not to over-expand at the end. I don't know what the government can do because no matter what they say, people won't listen. I mean, Alan Greenspan was warning about the stock market thing (before March 2000). People have been warning about this real-estate thing. But the dumb money comes in last. People buy because it's going up, and their friends are making money. Their neighbors are making money. Granny's making money.
WN: So what is the short-term outlook for real estate? Will current prices fall as money flows to stocks?
Dent: We're going to mainly see housing prices just kind of flatten -- maybe decline a teeny bit. We expect south Florida, the Northeast, California, Las Vegas and markets like that to actually decline, but most housing markets will simply just be at slightly negative or slightly positive or neutral. That doesn't cause a housing crisis.
WN: And what about in 2010?
Dent: You should sell your home -- particularly if you have a high-end home in a high-priced urban or suburban area. But in our next book that comes out around 2010, we'll also talk about ways to hedge real estate. You could borrow some money against a property that's got some equity in it and put the money in zero-coupon treasuries: something that would actually grow and create substantial capital gains if there was a slowdown. And, of course, if it doesn't happen -- the economy keeps booming and we're wrong -- well, your bonds go down a little bit but your real estate goes up. There are ways to hedge.
WN: Is there always a bubble somewhere?
Dent: Yes and no. We're in a whole bubble era. It started in the '70s with oil and gold and real estate, and then it spread to the stock market. And now it's back to oil and real estate. You have to go back to the early 1900s to see a similar bubble economy because that's when a lot of these economies were racing with much-higher-than-average productivity, all of these growth industries and all of this change. That's when you get bubbles. We didn't see bubbles in the (19)40s, '50s and '60s. This bubble boom will finally end around 2010 with the massive baby boom and the new technology trends.... I mean, by the end of this decade new technologies -- broadband, internet, wireless, home computing, all this stuff -- will have penetrated 90 percent of households in this country. The boom's over for a while. I mean, who are you going to sell this stuff to? You're down to West Virginia at that point.
Publicado originalmente en